A write-off is a reduction of the recognized value of something. In accounting terminology, a write-off refers to reducing the value of an asset while debiting a liabilities account.
The general scenarios for business write-offs include unpaid bank loans, losses on stored inventory, and unpaid receivables. Thus, a write off is mandated when an account receivable cannot be collected, when inventory is obsolete, when there is no longer any use for a fixed asset, or when an employee leaves the company and is not willing to pay the company back for a pay advance.
Businesses use accounting write-offs to keep track of losses on assets. In a balance sheet, write-offs include a credit to the associated asset account and a debit to an expense account. Expenses will also be entered in the income statement after deducting from the revenues already reported. The general scenarios for business write-offs include unpaid bank loans, losses on stored inventory, and unpaid receivables. Here is a detailed description of each of these cases:
Unpaid Bank Loans: Banks and other financial institutions use the write-off method when all the collection methods are exhausted. A bank’s loan loss reserves, a non-cash account that manages expectations for losses and unpaid loans, can give a deep insight into the write-offs. While loan loss reserves project unpaid loans, write-offs work as the final action taken on them.
Stored Inventory Losses: A company may have to write-off some of its inventory for several reasons, such as stolen, lost, spoiled, or obsolete. Writing off inventory on a balance sheet involves an expense debit for the value of unusable inventory and a credit to inventory.
Unpaid Receivables: When a business is convinced that a customer is not going to pay the bill, the business may have to write it off. On the balance sheet, the debit to an unpaid receivables account may have to be marked as a liability and a credit to accounts receivable.
Example of a Write Off
The best example of a write-off is a bad debt. A bad debt is an account receivable that can no longer be collected. In other words, the company or customer that owes you money either refuses to pay or is unable to pay back the money it owes. Rather than keeping this bad receivable on the books, companies remove or write off the receivable. There are two main write-off methods: the direct write off method and the allowance method.